The fall of net neutrality: Cable's plot to destroy the internet

Like any bloodless coup, this one takes place within the palace, beyond the purview of prying eyes. It's an inside job spearheaded by the ultimate in inside players, FCC Chairman Tom Wheeler. He's a former Obama fundraiser, cable lobbyist, and head of the cable trade association, chosen by the president to chaperon the very industry he once served.

Wheeler's loyalties were evident in May, when he proposed segregating the internet between the haves and have-nots. Under the plan, cable operators could charge large companies like Netflix extra to move their wares over a high-speed expressway. Anyone who couldn't pay the toll would be relegated to frontage roads.

Critics — who include most everyone but cable companies — believe Wheeler's plan will shaft consumers and squelch innovation. Present rules dictate that all traffic moves at the same speed, part of a long-standing principle known as "net neutrality." It puts a basement blog on the same footing as the Huffington Post, and enables smarter companies to eclipse market leaders in the way Facebook conquered MySpace.

Yet Wheeler's proposal would not only hand a windfall to his former masters. It would allow cable operators to slow customers' content, regardless of promised connection speed. And it would ensure that dominant tech companies could swat away smaller competitors that couldn't afford to pay the new tolls. Even venture capitalists oppose the idea, saying they're less likely to invest in start-ups placed at such a disadvantage.

In essence, Wheeler is about to place the most dynamic, growing sector of our economy into the hands of an industry legendary for its abysmal customer service.

U.S. Sen. Al Franken's assessment of the plot: "I'm sorry, you just made me sad."

The monopolies are coming

For years the internet has been governed by rules similar to those regulating phone companies. These laws were designed to prevent discrimination or denial of service under the premise that the phone's a basic necessity. Water and power companies operate under similar dictates. Many feel broadband should be treated the same way, given its increasing importance in every aspect of our lives.

It's even more critical considering the limited competition among internet service providers (ISPs) offering high-speed broadband.

While the phone companies' slower copper line service initially competed with cable, the proliferation of video has exposed the technology's native inferiority. So they ceded high-speed broadband to cable companies, most of whom enjoy monopolies in the cities they serve.

Cable broadband already serves nearly three-fifths of the country, and has added 85 percent of all new broadband subscribers in the past two years.

"If net neutrality is about anything, it's the recognition that we're probably not going to have a lot of extra competition quickly in the ISP business," says Dr. Gerald Faulhaber of the University of Pennsylvania. "In essence, network neutrality is a way to keep monopoly or duopoly cable/teleco ISPs from abusing their market position."

But instead of regulating broadband for the greater good, Wheeler's handing America's most hated industry control of our future.

First in our pockets,
last in our hearts

To trust cable with the nation's communications backbone requires a fanciful leap of faith. The industry has a tattered history of price gouging, litigiousness, poor customer service, faltering investment, and legislative manipulation. Now the industry's largest company is attempting to swallow its closest competitor, further constricting consumer choice.

In February, the No. 1 pay-TV provider, Comcast, announced the proposed purchase of No. 2 Time Warner Cable. Comcast has promised to sell enough television markets to limit the new company to 30 percent of the pay-TV market nationally. (The plan includes spinning off markets such as Minneapolis-St. Paul into a third company in which Comcast would have a minority stake.)

The divestiture is voluntary, meant to mollify the FCC. But tellingly, Comcast has offered no such concessions on its more profitable broadband business. The merged companies would provide service to more than 40 percent of the country, including half of all high-speed connections.

Not only would the merger give one company unprecedented market share, but it promises to forge a new standard in bad customer service.

Even within the most despised American industries — cable and internet — Comcast and Time Warner are annual bottom-dwellers when it comes to consumer ratings, according to the American Customer Satisfaction Index. (Neither of the companies responded to repeated interview requests.)

But thanks to Comcast's monopoly position, there's little incentive to please its clientele. In 2012, Comcast's average revenue per subscriber was $143 a month — up 140 percent in the past decade.

The entire industry has raised prices two and a half times faster than inflation since 1998. Meanwhile, its investment in broadband infrastructure is flat — and more than 15 percent off its 2001 peak.

Most businesses see failure to invest as a recipe for wreckage. Not cable. Once the pipe is laid, each new subscriber to broadband is almost pure profit.

Unfortunately, that lack of investment also causes internet congestion. Which cable, rather disingenuously, is now using as an excuse to charge high-traffic companies like Netflix greater fees.

"They're not making a commensurate investment to get us to where we need to be or where consumers want us to be, because their investment plan's based on managing that scarcity," says Mike Wassenaar, a former program director at KFAI radio who now works for the Alliance of Community Media.

In other words, operating on the cheap can be very good for business.

Would you like the Democratic Party gift wrapped, sir?

Owning the content as well as the pipes gives Comcast an unprecedented advantage. That's why Senator Franken objected to the company's $13.8 billion purchase of NBC/Universal in 2010.

Acquiring NBC turned Comcast into an entertainment juggernaut with at least two dozen cable channels (Bravo, SyFy, USA), numerous production companies, a movie studio, and theme parks. It even owns one-third of the pay-TV alternative Hulu.

Since Comcast owns much of its TV programming, its competitors will always pay more. Meanwhile, due to its sheer size, Comcast can command better prices from other programmers. And by owning numerous NBC affiliates, the company also pockets rich retransmission fees that pay-TV must send to local network broadcasters.

With Comcast already holding the most dominant market position in both cable and internet, a newfound ability to charge extra for faster internet creates tremendous incentive for abuse.

Not that government seems to care. Republicans have shown little interest in thwarting monopolies, and have often been downright hostile to consumer protection. With the cable industry slathering Democrats with money, expect few outside Franken to make a fuss.

Last year, Comcast spent $18.8 million in lobbying, the third-most by any corporation. It's made over $7 million in campaign contributions since the last election cycle, nearly 60 percent of that to Democrats. With mid-term election season coming, politicians aren't typically interested in ruffling the fattest donors.

"The public interest is best served by having an open internet," says Congressman Keith Ellison (DFL-Minneapolis). "Once you start introducing payola, or pay-to-play to have a faster lane, you penalize anybody who can't pay the top dollar.... You're going to have special interests trying to advance their profitability and win friends. I hope my colleagues understand they're here to look out for the public interest."

That's easier said than done when Comcast President Brian Roberts golfs with Presidnet Obama, Executive Vice President David Cohen raised $2 million for the president's campaigns, Wheeler raised an additional $700,000, and former Comcast Vice President David Krone now serves as Majority Leader Harry Reid's chief of staff.

The cherry on top: Comcast also owns MSNBC, the official cheerleader for the Democratic Party.

"Millions of people raising their voice is one thing," says Christopher Mitchell of the Institute for Local Self-Reliance in Minneapolis. "Comcast raising millions of dollars is another.... Comcast is a huge fundraiser for the party and you just can't get away from that."

The FCC takes a dive

The origins of net neutrality go back a dozen years to when then-FCC Chairman Michael Powell (yes, Colin's son) decided to deregulate cable broadband. (The FCC failed to respond to multiple interview requests.)

Powell, befittingly now president of the National Cable and Telecommunications Association, believed this would spur competition and new technology. Instead, it hastened industry consolidation and slowed investment.

The FCC's been trying to walk back Powell's decision ever since. The easy move would have been to regulate all internet providers like phone companies. But the agency chose an industry-friendly path, proposing a series of tender rules that have been sabotaged by lobbying and lawsuits. Twelve years later, the FCC is still trying to corral the industry.

The absence of regulation has allowed ISPs to push the line. In 2007, Comcast was caught secretly throttling the speeds of customers using the file-sharing software BitTorrent. The company claimed it was necessary because they were using too much bandwidth.

This behavior not only violated net neutrality, but prompted the FCC to demand greater transparency in how ISPs manage their traffic. Comcast took the FCC to court and won.

In January the FCC's latest attempt at net neutrality rules were tossed out. They were judged too similar to those governing utilities. If the FCC didn't want to classify broadband as a utility, it couldn't be regulated like one.

As a result, the FCC's only choice was piss off cable by making it a utility, or allow the industry to wreak havoc on the internet.

Time Warner and Comcast have offered Washington their input — in tens and twenties — to the tune of $30 million since the last election. With volume like that, the FCC couldn't help but listen.

Wheeler's Appomattox

In May, Wheeler offered new rules that carve out a loophole for "paid prioritization." All data would still move freely. It will just move faster for those with cash.

Wheeler claims that ISPs will be barred from "commercially unreasonable" behavior — such as Comcast creating a faster lane for its own content.

"If anyone acts to degrade the service... for the benefit of a few, I intend to use every available power to stop it," he promised in an April blog post.

That's great rhetoric, but once loopholes are built, they tend to expand rather than constrict. And it's certainly easier to limit anti-competitive behavior from the start — before smaller companies are already vanquished or debilitated.

Cable industry chieftain Michael Powell has already promised "World War III" if the feds move to utility-style regulation. But the idea is already working in other countries, where American internet service would be considered primitive by comparison.

Throughout Europe and East Asia, broadband providers are forced to lease their lines to all comers. That's led to dramatic gains in coverage, pushing America toward the middle of the global pack in terms of usage (we're 24th), average speed (10th) and broadband penetration (15th).

"We should actually turn the car around," insists Franken. "Other countries that turned the car around and went in another direction wound up with a lot more choices for people and much more wired than we are."

The feds took a similar approach in the 1980s, when they forced the Baby Bell companies to do same thing. All were required to license access to their lines, opening the door to all kinds of innovation.

"It accelerated the spread of wireless and the internet by allowing small, independent ISPs to use the wires in a non-discriminatory way," says University of Minnesota professor Andrew Odlyzko, a mathematician who worked at Bell Labs prior to the breakup. "They tried to discriminate and get permission to charge extra for internet but they were refused — otherwise it would've probably strangled the internet."

No fiber for you

Of course, a corporation's existence is based on exploiting advantages, not working for the public good. So when some cities began to lay their own lines and offer broadband and pay-TV, cable moved aggressively to protect its turf.

In more than 20 states, the industry has promoted laws restricting cities from creating their own fiber networks. Minnesota requires towns to pass a referendum with an unusually high 65 percent of the vote.

And in cities like Longmont, Colorado, and Chattanooga, Tennessee, cable spent millions on lobbying and lawsuits to subvert competition.

Chattanooga fought back. Its municipal power company, the Electric Power Board (EPB), wanted to improve its grid, since electricity disruptions cost the local economy $100 million annually. By connecting high-speed fiber to every home, it could improve the resiliency of the electrical grid and quickly diagnose problems. Outage times were cut by 60 percent.

The lines had the added advantage of providing the city's power customers with television, phone, and internet connection speeds more than 10 times faster than the national average.

"The cable folks didn't want us to do it," says EPB Vice President Danna Bailey. "They launched a pretty aggressive advertising campaign against it when we first started the process.... It was kind of funny because the campaign encouraged viewers to call the City Council and tell them you don't want EPB to build this network. City Council reported more calls — by a huge margin — saying they do want EPB to build this network."

Today, the city's broadband not only pays for itself, but reimburses the power company with a reasonable licensing fee for using the lines. You can understand why cable feels threatened.

"It's a different model," say Bailey. "We get to wake up every day and think about what we can do to be a better asset to the community.... That's the whole reason municipal power exists in the first place."

Higher-speed internet has helped attract small but growing tech companies like Claris Networks, EDOps, and Lamp Post Group. New start-ups have also flocked to the area, including Mental Health Analytics, run by Dr. Ashish Gupta. The former University of Minnesota professor took a job at the University of Tennessee-Chattanooga so he could start his new company there.

All of which has left Fortune to label Chattanooga "a center for innovation." Wired believes it could be the next Silicon Valley.

Though fiber was a side benefit, for many municipalities it's the only answer to under-responsive telecom franchises, especially for out-state cities without the size to keep internet and pay-TV providers honest.

"That's why communities of a certain size are looking at municipal operations," says Wassenaar. "If you're a city of 50,000 or lower in a rural area, your ability to get 21st-century cable service is pretty low unless you provide it yourself."

Last year, Minnesota established the Office of Broadband Development. In May, the Legislature allocated $20 million to leverage private investment in rural communities.

"I talk to [rural] communities and they say to me the number-one thing people talk about isn't how good are the schools, but how good is the internet access," says state Rep. Matt Schmit (D-Red Wing), an architect of the plan. "The analogy here is rural electrification. You want to make sure everyone has that basic access to 21st-century infrastructure."

Windom installed municipal fiber a dozen years ago. Its first public vote failed after Qwest, the local internet provider, promised to install DSL. But when Qwest reneged, the next vote passed by 87 percent.

Wheeler has signaled a willingness to fight restrictions on cities. In June, citing Chattanooga's example, he wrote: "It is in the best interests of consumers and competition that the FCC exercises its power to preempt state laws that ban or restrict competition from community broadband. Given the opportunity, we will do so."

The quest to tame Netflix

Unfortunately, anti-competitive alarms keep ringing at the FCC. In addition to municipal fiber and the Time Warner merger, Wheeler's investigating complaints by Netflix that its users were kidnapped.

Netflix has accused Comcast, AT&T, and Verizon of holding its customers hostage. Last September, Netflix suffered a sudden, simultaneous decline in the speed in which its shows traveled across those companies' networks. Video sputtered and picture quality decayed, while customers of smaller companies like Cox and Cablevision saw no such hiccups.

Video files consume huge bandwidth, and Netflix's avid customer base is prone to binge-watching. That leaves the company accounting for 28 percent of all U.S. web traffic. (By comparison, YouTube is second at 17 percent.)

Comcast, AT&T, and Verizon felt Netflix should pay for all that traffic — and had the leverage to do it. Netflix ultimately caved and paid Comcast and Verizon (but not AT&T) undisclosed sums. Just as quickly, users on Comcast saw an extraordinary jump in quality.

The whole episode has the appearance of extortion. It also demonstrates the power of internet providers to make or break services.

Even after paying the ransom, Comcast users still experience slower Netflix speeds than Cox and Cablevision customers. But if it wanted to maintain its business, Netflix had no choice but to pay.

"Comcast knows it can charge Netflix more," says Mitchell. "Netflix had to choose between watching their business model crumble and paying Comcast a toll to access its customers."

While Professor Odlyzko appreciates Netflix's complaint, he's not all that sympathetic. He notes that Netflix is also trying to create its own content monopoly. For the moment, Amazon and Hulu are distant also-rans with under 3 percent of web traffic combined.

"One of the things that made me reluctant to get involved in the net neutrality debate is that at the moment most of the public's attention is attracted to a struggle between very big monopolistic companies — telecoms on one side and Netflix on the other," Odlyzko says. "A lot of what you hear is basically posturing by the sort of big guys that at some stage may need to be regulated."

Closing off the internet

Odlyzko is more worried about small companies like the UpTake, a nonprofit online news organization in the Twin Cities. Seven years ago, Executive Director Jason Barnett and his partners recognized how their video could reach small, dedicated audiences.

UpTake has covered stories involving hours of streaming video in a way no broadcast station would dare, from real-time footage outside the 2008 Republican National Convention to live coverage of the Franken election recount. It also live-streams Minnesota legislative sessions.

"During the RNC we were using live-stream video through cellphones and were able to show what was happening at a street level to an international audience," says Barnett. "It was a ton of fun, crazy, and kind of shocking what we went through to do that. None of that would've been possible without easy access to the internet and being able to live stream video."

Believe it or not, there's money in this so-called "long tail" form of coverage. The UpTake has built a catalog of over 6,000 videos on its YouTube channel. Small, independent operations are making a living appealing to narrow niches, rather than fighting in the mainstream marketplace for a sliver of mass attention.

"[The videos] all generate revenue for you, a penny at a time, and it adds up." says Barnett. "It's not a lot of money, but enough money to pay our rent and a couple other bills. That's really what the internet provides. You can develop a sustainable business if you're able to capture enough of these niche audiences."

Those audiences are the very people Congressman Ellison fears will be left behind. If it's forced to pay more for decent internet speed, the UpTake will likely see its tight profits turn to losses. This added pressure weighs especially heavy on newborn companies with little money. It's especially troubling for an economy that's witnessed declining entrepreneurship over the past quarter-century.

For consumers, video and live-stream music will either face slower speeds or higher prices under Wheeler's proposal.

"I'm worried we're pulling the ladder up after some big boys have gotten on top of the roof," says Ellison. "We don't need a situation where these big companies, once their fortunes are made, solidify their position by closing off the internet."

Returning fire with paper

After Wheeler's plan was announced, nearly 150 tech companies sent a letter to the FCC, arguing against the fast lanes. "The open internet," they wrote, is "a central reason why the internet remains an engine of entrepreneurship and economic growth." Amazon, eBay, Facebook, Google, Microsoft, Netflix, Twitter, and Yahoo were among the signees. (Apple was conspicuously absent.)

A day later, 50 venture capital firms also sent a letter, noting how often they invest in fledgling companies trying unproven ideas. Since then, there have been reports of a decline in tech investments over fear that new companies will be placed at a disadvantage.

"Without lawyers, large teams, or major revenues, these small start-ups have had the opportunity to experiment, adapt, and grow, thanks to equal access to the global market," investors wrote to Wheeler. They worry that ISPs will favor their own offerings or discriminate against competitors. "They just need to create a credible threat so that investors like us will be less inclined to back those companies."

But it remains to be seen whether these same titans will put their own money to work lobbying against cable.

"It's a neat coalition, but I don't know where their lobbying dollars are going," says Barnett. "Yeah, they signed this letter and sent it to the FCC. Kudos to them. But, you know, show me the money."

"They're in the business
of dominating"

In the end, regulating broadband as a utility appears the simplest way of ensuring the internet doesn't grow as concentrated as the rest of the economy.

"People would be up in arms if you suddenly had to pay a toll on your phone calls based upon which companies you were calling," Wassenaar points out. "The social expectation for how phone service works is built upon the regulation we imposed upon these corporations. And if they were treated as utilities, the public could actually determine if there is enough investment."

Of course, the rules imposed on the phone companies didn't break them. Verizon and AT&T are doing just fine, thank you. While cable may be dealing with the erosion of its pay-TV franchise, its broadband service will only grow.

"They'd be able to adapt just fine, but they're not in the business of adapting," says Barnett. "They're in the business of dominating."

He's not hopeful that consumers will be protected. "When you have a fairly complicated issue and all the money — and I mean all the money — is on one side of the issue, it's pretty clear what's going to win."

While Congress has oversight and could intervene, it can barely muster a consensus to scratch its own belly, much less pass legislation. That leaves the five FCC commissioners to decide, with Wheeler as the swing vote. At least he has a sense of humor — sort of.

In a segment on his HBO show Last Week Tonight, host John Oliver suggested that putting a former cable lobbyist in charge of net neutrality was like calling a dingo to babysit your kids. The episode caused such an uproar that viewers crashed the FCC's website with their comments.

Wheeler responded by insisting "I'm no dingo." Time will tell.

The new rules won't be adopted until at least September 15, and the public can still comment at FCC.com until July 15.